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Abstract: The USDCAD is consolidating in the middle of the long-term symmetrical triangle pattern around 1.3500 and is about to break upward. Traders bet that the Bank of Canada will have to raise interest rates to end its "conditional suspension" after the strong CPI report was released earlier this week.

Fundamentals

Earlier last week, Canada released its CPI data for April, the overall data was higher than expected, at 0.7%, and the market was expected to be 0.5%. It raised the inflation rate to 4.4%, which is the first increase of this indicator since last June.

Canada's inflation rebounded in April, and the CAD benefited temporarily. However, the CPI report will not have a significant impact on the CAD. Inflation data has provided a significant impetus for the expectation of interest rate hikes in the market, which has benefited the CAD at least temporarily.

As Canadian investors know, the Bank of Canada announced in January that its interest rate hike cycle was "conditionally suspended". Just as Federal Reserve Chairman Powell hinted to suspend interest rate hike earlier this month, investors believe that the Bank of Canada has reached the highest interest rate in this cycle, and the next move of the Bank of Canada will be to cut interest rates.

At least for Canada, these expectations may be wrong.

Supported by last week's CPI data and Canada's overall better-than-expected economic data, we have seen a dramatic repricing of the market's expectations of Canadian interest rates. In the past few weeks, futures traders have changed from expecting to cut interest rates at least once before the end of the year to almost completely expecting to raise interest rates again at the end of the third quarter; More directly, traders now expect that the probability of raising interest rates at the next meeting of the Bank of Canada in early June is about 30%.

Technical Analysis

From a technical point of view, the USDCAD has been at a higher low point and a lower high point since mid-March, and has formed a symmetrical triangle pattern in the 1D timeframe. Described by the laws of physics, this mode is similar to a compressed spiral spring, and energy accumulates in the spring as the time range continues to shrink. When one of the pressure points is finally removed, the energy of the spring will be released in one direction.

It is notoriously difficult to predict the direction of a symmetrical triangle's breakthrough in advance, especially in the market where there is no clear trend before this model; Therefore, the mid-term transaction may want to wait for the confirmation of the breakthrough to signal the next major breakthrough.

The USDCAD trades around 1.3500 in the middle of this week's range. If the exchange rate rebounds to the mid-1.3500 resistance level or falls back to the low support level, short-term trading can be considered to make a clear direction in the symmetrical triangle model.

The stochastic oscillator could be offering a potential way out of the current impasse. It is hovering in the 50 neutral range, but it is also testing the support set by its SMA. A break below could encourage the bears to push the USDCAD to another lower low.

However, the primary target that the bulls need to break out of at the moment is the 1.3482-1.3536 zone consisting of the 50-day, 100-day, and 200-day SMAs and the low of October 4, 2022, respectively. Then a continued test of the 1.3600 level would follow, paving the way for a further test of the 1.3700 level.

In addition, the USDCAD formed a bullish double bottom pattern (the bottom of April 14 and May 8). However, bulls should avoid hasty actions and must first break through the 1.3667 neckline. If this happens, the potential upward target of this pattern will be located in the 1.3900 area.

Overall, the USDCAD bulls are at a critical point and could move further higher at any time. It is recommended to buy the dips.

Trading Recommendations

Trading direction: Long

Entry price: 1.3550

Target price: 1.3800

Stop loss: 1.3380

Deadline: 2022-06-07 23:55:00

Support: 1.3512, 1.3453, 1.3407

Resistance: 1.3667, 1.3700, 1.3745